This year could be definitely the worst ever for South Korean shipyards, whose balance sheets are swamped with mounting losses, but their slump and worsening profitability may continue into next year due to lower oil prices and weak demand for new vessels, analysts said.
Hit by an industrywide slump and increased costs, the country’s big three shipbuilders — Hyundai Heavy Industries Co., Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy Industries Co. — have logged a combined loss of 4.7 trillion won (US$4 billion) in the first half of the year, and their loss is widely expected to amount to over 7 trillion won for the full year as there’s a delay in the construction of offshore facilities and a drop in new orders.
The combined operating loss by the country’s big three shipyards is estimated at 7.8 trillion won for the year, marking the first time they have suffered operating losses on an annual basis.
Daewoo Shipbuilding, in particular, has suffered a more than 4 trillion-won loss in the first three quarters.
“Their losses stemmed mainly from large-scale offshore facilities, and new orders continuing to fall in line with a drop in global oil prices,” said Jun Jae-chun, an analyst at Daishin Securities.
For the past few years, South Korean shipyards had enjoyed their heydays on soaring oil prices, but since 2013, such prices have plunged, leading to a drop in new orders and local shipyards bearing the brunt of clinching deals for low-priced ships.
Industry data show that South Korean shipbuilders’ new orders in November fell to the lowest level in six years amid woes over their growing losses.
South Korean shipyards bagged new orders totaling 79,834 compensated gross tons (CGTs) last month, the lowest since September 2009.
The drop in new orders has made them miss this year’s order targets.
They racked up a combined $26.1 billion worth of orders through November, a little more than half of this year’s order target of $47 billion, according to the sources.
By company, Hyundai Heavy clinched orders worth $11.6 billion in the first 11 months of the year. The shipyard has targeted to bag orders worth $19.1 billion.
Daewoo Shipbuilding is also forecast to fail to meet its order target of $13 billion. During the 11 months of the year, the shipyard logged $4.3 billion worth of contracts.
Samsung Heavy received orders valued at $10 billion, far lower than this year’s order target of $15 billion.
The massive losses are prodding local shipyards to sell assets and cut costs.
They are rolling out a set of self-rescue measures that will save a combined 2.5 trillion won.
Daewoo Shipbuilding is seeking to cut costs, and sell some affiliates and its headquarters office building in Seoul, saving 1.85 trillion won in cash. Its creditors, led by the state-run Korea Development Bank, are set to inject a total of 4 trillion won into the loss-making shipbuilder.
Hyundai Heavy is reducing the wages of its senior staff and cutting costs, which are expected to help save some 500 billion won.
“Due to a slump in worldwide orders, global shipyards’ bad performance will stretch into next year,” said Ryu Jae-hoon, an analyst at NH Investment & Securities.
The analyst said additional losses from their offshore facility business could arise and severe competition among major players to win more orders will further hurt their profitability.
“It is hard to predict a turnaround in their bottom lines unless there is a meaningful rebound in global oil prices,” the analyst said.
According to the report compiled by the KEXIM Overseas Economic Research Institute, the shipbuilding industry will face a protracted slump next year on a contraction in demand for offshore facilities and a slump in the global shipping industry.
“Due to a severe slump in the offshore facility segment, the shipbuilding industry will continue to trend lower down the road,” the report said. “Demand for LNG carriers, one of South Korean shipbuilders’ cash cows, is also likely to contract for the time being.”
Adding to woes are their worsening business conditions. Oil prices do not have signs of a sharp recovery, reducing demand for oil drilling rigs and other offshore facilities.
Global oil prices recently have hovered around a six-year low of below $40 per barrel, and analysts say shipyards could face a further drop in new orders if the oil prices stay at current levels.
“Usually, oil prices of over $60 per barrel are seen as a critical point where oil majors place massive new shipbuilding orders,” said Lee Ho-seung, an analyst at KDB-Daewoo Securities. “The question now is how long will the current situation unfold for, rather than how much will the oil prices further drop,” the analyst said.
Analysts said it will take time for oil prices to rebound, and in turn, any meaningful recovery in the shipbuilding segment will be further protracted.
“It is hard to predict a rapid recovery as a whole for the shipbuilding sector,” said Lee Jae-won, an analyst at Yuanta Securities. The analyst said sales will start to decline down the road due to a slump in new shipbuilding orders seen in the past two years.